Annuities (fixed, index or variable) can be used as accumulation tools, or income tools, or sometimes both. Usually there are some type of contractual guarantees which may be attractive depending on the investment objective and risk tolerance of the client.
Annuities can be good or bad depending on several criteria. These would include:
- The fees and charges should at least be reasonable for 1) the underlying contract, 2) any riders and 3) the underlying investment expenses.
- Some annuity contracts are now fee-based and available without any surrender charges, but in most cases, the shorter the surrender charge, the better.
- Annuities can be oversold and overlook potential needs for liquidity, As a guideline, we don't recommend having more than 33% of funds in annuities. The smaller a client's net worth, the smaller percentage, and those with a higher net worth may afford a larger percentage if they have adequate liquidity.
- If longevity is a concern, you can purchase a lifetime income and shift that risk of running out of money to an insurance company. This usually does not require annuitizing the contract, so your beneficiary would receive any remaining account balance should you die prematurely.
- Taking a baseline income from an annuity can reduce the need to take income from other investments. This is helpful, especially when markets are volatile. Selling investments to provide needed income when markets are down may not be the best strategy for a simple and secure lifetime of income.
Annuities are complex, but we understand their use, and misuse, and advise clients accordingly. For those who already own annuities, we include them in the overall financial/retirement income plan and reevaluate those contracts for the clients who own them.
